Monday, July 9, 2012

A Story of Higher Taxes & Tax Cuts and of Spending and Spending Cuts

When we look at the last 3 decades of economic activity, under five different presidents, we find an interesting story.  A story of how higher taxes, tax cuts, increased spending,  and spending cuts affected the economy; specifically, in terms of how the Gross Domestic Product (or, our total economic output) was impacted.  And, the reason that I chose to look at the Gross Domestic Product (GDP) is because a healthy and growing GDP means less unemployment and higher federal tax revenues.  Or, in other words: If our businesses are growing and their economic output is increasing, they will pay higher taxes and hire more employees; who, in turn, will also pay taxes. So,  to tell that story, I've prepared this chart; making note of the President who was in office at the time and what tax changes and spending took place at the time:

Reagan/George H.W. Bush. When George H.W. Bush took over the presidency from Ronald Reagan in 1989, he inherited a roaring economy that was a pure product of Reaganomics.  In 1988 and 1989, the economy grew at 7.69 and 7.48 percent; respectively.  But, Bush also inherited deficits from Reagan.  That's because Reagan used over-the-top military spending to break the back of the Soviet Union and stop the Cold War in its tracks.  So, the task became to reduce the deficit.  Working with the Democrats, Bush agreed to reduce spending and raise taxes to reduce the deficits; with the tax increases starting first.  So, the famous "Read my lips. No new taxes" taxes when into effect.  But, as we know, today, the Democrats snookered Bush and they never implemented a single, promised spending reduction to also help reduce the deficits. The result of those tax increases was simple: The growth in the economy slowed significantly; with GDP growth slowing to as low as 3.3%  in 1991.  Ultimately, Bill Clinton was able to use his famous "It's the economy, stupid" to defeat Bush.

Bill Clinton. Bill Clinton increased taxes in 1993.  Primarily aimed at the rich, it raised the top income rate from 35% to 39%.  It increased the corporate tax rate to 35%; and, removed the tax cap on Medicare taxes so that the rich paid more.  Now, to this day, Democrats point to the fact that the economy got stronger after taxes were raised on the rich.  And, if you look at 1994, the economy was actually stronger than it had been the year before; when taxes were lower.  But, the real reason that the GDP jumped in 1994 wasn't taxes.  It was the 1993 passage of the North America Free Trade Agreement (NAFTA). Because of that treaty, American manufacturers did a one-time ramp up in inventories (product) in anticipation of increased trade with Canada and Mexico.   It's the same thing we see, every year, when manufacturers hike production to cover Christmas and holiday buying season.  But, to get to the true answer on whether or not tax hikes on the rich helped the economy, you need only look to 1995 where growth was at only 4.65%.

In 1997, Clinton bought into Newt Gingrich's "Contract with America" and signed into law the Balanced Budget Act.  That law dramatically cut spending in many areas of the government.  It created a budget surplus which many Democrats only attribute to Bill Clinton.  More importantly, the economy grew at an average of over 6% during Clinton's last 4 years in office.  At least until the dot com bubble burst in late 2000.

George W. Bush. In 2001, the economy took a one-two punch.  First, the economy was already slowing when George W. Bush took office; with the slowdown due to the collapse of the dot com bubble the year before. Growth for the First Quarter of 2001 slipped to just 1.3%.  So, in June of that year, Bush signed into law the first round of tax cuts to stimulate the economy; with most of the cuts phased in over a period of 9 years.  Initially, it looked like the cuts were working, and, then, the knockout punch came with 9/11.  The result was that growth slowed to just 1% in the 3rd Quarter.  Some conservative economists think the impact of 9/11 would have been much harder had the cuts not been in place. That may be true because, despite the horrendous impact of 9/11, the economy did remain above water.

In 2003, it was obvious that the economy was not recovering fast enough.  So, the second round of Bush tax cuts were put into effect.   Actually, the 2nd Bush cuts were the same as the first; except that, instead of a 9-year phase in, the cuts were made immediate.  As you can see from the chart, the economy started growing again until late 2006 when the Great Recession hit.

Barack Obama. As is well known and as we are reminded of with nearly every Presidential campaign speech, Barack Obama inherited the Great Recession which started in December of 2006 and that ended 5 months after Obama took office.  Not knowing that the recession would actually end just 4 months later, Obama and the Democrats sign into law a $787 billion stimulus bill in February of 2009.  Monies under that law were to be sent out to the states for shovel-ready projects that would help put people back to work.  But, there was a snag and these so-called shovel-ready projects weren't so shovel ready.  In fact, money for the first projects didn't go out the door until August; almost two month after the recession had ended.  In fact, only about 26%, or so, of the stimulus was applied in 2009.  Yet, from 2009 to 2010, the economy actually turned itself around.  And, it did so despite the stimulus.  If anything, the application of more stimulus in 2010 and 2011 only saw a slowing of the economy.

Summary.  From the above we know that Reaganomics, with a combination of broad tax cuts and selective tax increases, produced the hottest economies in the last 3 decades.  Tax increases had negative results under Bush Sr. and Clinton; even when the Clinton taxes were only aimed at the rich.  Spending cuts by Clinton in 1997 made him a surplus spending hero.  The "W" Bush tax cuts, too, netted positive results.  And, Obama's massive spending has only produced a lackluster recovery. 

Conclusion.  It is spending cuts and tax cuts that have historically given our economy the biggest boost.  The last thing we should do is allow Obama to have another stimulus in the form of a jobs plan and raise taxes on the rich.  Both these actions have produced nothing but slow economies; and, if you researched it, you would also find higher unemployment.  This is why, everyone in the country should push for the Simpson-Boles Deficit reduction plan or the tax and spending plan from Paul Ryan.  Either would make this country better off than what Obama plans to do.

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